Advanced corporate finance concepts and applications

Corporate Social and Environmental Reporting: Greenwashing or Legitimate Accounting Practice?

Corporations have increasingly been viewed as owing a social and environmental responsibility to a wide range of stakeholders, including their employees, shareholders, the communities in which they compete as well as the larger populations they serve. In some jurisdictions, social and environmental reporting is required by law while corporate social and environmental reporting is a voluntary practice. Therefore, when corporations engage in corporate social and environmental reporting, it is clearly intended to further their best interests and image among their stakeholders. For instance, according to one economist, "The main motivation for corporate [social and environmental] reporting ... is to enhance corporate image and credibility with stakeholders" (Adams, 2002: 244-245). This paper reviews the relevant literature to provide the basis for an agreement with Adams' assertion, followed by a summary of the research and important findings concerning corporate social and environment reporting in the conclusion.

Review and Analysis

Corporate social and environmental reporting has been generally defined as the "process of communicating the social and environmental effects of organisations' economic actions to particular interest groups within society and to society at large" (Gray, Owen & Adams, 1996: 3). In short, corporate social and environment reporting is used by organizations to communicate the litany of social and environmental initiatives they have implemented to that have an effect on (a) employee related issues, (b) community involvement, (c) environmental concerns, and, (d) ethical issues, among others (Gray et al., 1996). Therefore, when corporations engage in corporate social and environmental reporting, they are providing information concerning their various interactions with society that are intended to promote targeted social and environmental issues that have relevance for their stakeholders (Gray et al., 1996).

The overarching goals of social and environmental disclosures and reporting by corporations in general are as follows:

1. Gain legitimacy from the external stakeholders;

2. Demonstrate transparency and accountability dimensions of good corporate governance;

3. Enhance and sustain corporate credibility and reputation;

4. Create stakeholder value in the long run;

5. Inform the policy makers and regulators of the active role of the modern corporation in corporate social responsibility;

6. Promote brand equity and market share of the company;

7. Establish linkage between corporate social and financial performance;

8. Participate in international business with globally compatible business practices focusing on stakeholder engagement;

9. Develop organizational capacity-knowledge, skills, and attitudes for promoting socially responsive business practices; and,

10. Comply with global environmental and sustainability standards (Baxi & Ray, 2009: 357).

Although the foregoing list of goals is far more comprehensive than the introductory assertion by Adams (2002), the foregoing list is highly congruent with his listing the enhancement of corporate image and credibility with stakeholders as the main motivation for corporate social and environmental reporting.

It is important to note, though, that these goals are also the result of several decades of experience with corporate social and environmental reporting. While the practice is not new, there has been increased focus on corporate social and environmental reporting since the turn of the 21st century, but there are some fundamental differences with respect to which corporations are required to perform such reporting as well as the jurisdiction that is involved. For example, according to Baxi and Ray, "The subtle difference between corporate environmental reporting and environmental reporting stems from the fact that the former is voluntary in nature while the latter is mandatory. Across the globe corporate environmental reporting has been voluntary in natur" (2009: 356).

When corporations engage in any type of voluntary practice that costs money, it is also important to determine how these investments of scarce organizational resources are adding value for the corporation's shareholders and fulfilling the responsibilities of the corporation to its stakeholders. In other words, when something is voluntary, there has to be something in it for the corporations, otherwise it would not be in their best interests to do so. In the case of corporate social and environmental reporting, the real value can only be realized if the reporting contains actual social and environmental programs that have achieved their objectives. When this is the case, the return of corporate social and environmental reporting can be significant. For instance, Baxi and Ray point out that, "Environmental management has become important for the companies whose prime objective is to minimize environmental degradation by the companies in various ways like reduction in waste generation, energy consumption and efficient use of resources. This in turn will bring down the cost of the companies" (2009: 357). Not only can truthful corporate social and environmental reporting help companies eliminate waste and reduce their impact on the environment, taking these steps in real-world situations can help organizations gain and sustain a competitive advantage over their counterparts that do not engage in these practices. In this regard, Baxi and Ray add that, "Companies may gain competitive edge over time by a more effective system of environmental management" (2009: 358).

Therefore, companies should recognize that timely and accurate corporate social and environmental reporting can provide them with a competitive advantage over their counterparts that do not, especially in jurisdictions where the process is entirely voluntary and represents an additional corporate expense. It is reasonable to suggest that some corporations may simply want to "do the right thing," and this represents an essential component of the process. For example, Jennings (2008: 77) reports that, "The starting point is the company's vision (which embraces the concept of decency and the need to find a balance between compassion and competitiveness) and values (among which conducting business in a socially and environmentally responsible way is central)." Good intentions, though, are certainly insufficient to provide the eventual return on investment that can reasonably be expected from thoughtfully implemented and carefully administered social and environmental programs. As Jennings asks, "How can these sophisticated concepts be made an integral and measurable part of the business? How can they add value rather than be seen as an encumbrance?" (2008: 78).